Deflation in Zimbabwe?February 2, 2009
How can a currency be in short supply and hyperinflationary at the same time? Economics 101 tells us that reducing supply should increase price, but that doesn’t seem to apply in this case. Perhaps it’s because most banking happens electronically, or perhaps it’s because hyperinflation is as much psychological as monetary. They have lost confidence in the Zimbabwe dollar and there is nothing the government can do about it. Once the process gets going, even if you take away the punch bowl nobody cares. I seem to remember Bernanke making the case US dollars will not lose their reserve currency status because there is a shortage around the world.
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If you knew your money in the bank is going to be worth half it’s value tomorrow, you’d want to get it out and spend it as quickly as possible too. This kinds of explains the short of money side.
On the other side, you have people who actually have money on hand trying to get rid of it as fast as possible in exchange for tangible goods. Fast money = high money velocity = hyperinflation.
That’s my point, psychology is an important reason governments (including the US government) will have a difficult time preventing hyperinflation should people lose confidence.